North Carolina is getting a big revenue surprise. Let’s use it the right way

In May, as a pandemic-induced recession loomed, North Carolina budget officials scaled back tax revenue estimates and braced for a shortfall that could be even worse.

Seven months later, there’s a welcome surprise. State tax revenues have exceeded those grim projections.

Revenue in fiscal year 2019-20 (which ended on June 30) surpassed the forecast by $513 million (2.2 percent). In the first five months of this fiscal year, General Fund revenue is up over the same period in the last fiscal year by $426 million (4.4 percent). Sales tax revenue – boosted by a tax on online sales that have soared during the pandemic – is up significantly.

Marcia Evans, a spokeswoman for the state Office of State Budget and Management said, “The better-than-anticipated revenue collection was due in large part to the initial economic buffer provided by federal fiscal stimulus measures, which bolstered consumer spending, kept some employees on the payroll, and provided relief to those unemployed.”

Uneven impact

While the stimulus funds played a big role – and an expected second round will be crucial to sustaining North Carolina’s recovery – there is another reason for North Carolina’s resiliency: its concentration of industries that have prospered despite the pandemic.

“What’s for sure happening is there is a wide dispersion in terms of the economic impact on people and businesses,” said Gregory Brown, a professor and executive director of the Kenan Institute of Private Enterprise at the University of North Carolina. “Certain industries – the tech industries, parts of health care, finance and real estate – have done extremely well.”

That pattern is a national one. The Washington Post reported last week that between April and September 45 of the 50 most valuable publicly traded U.S. companies turned a profit.

This hardly means all is well in North Carolina. The unemployment rate has fallen, but is still well above the pre-pandemic rate. Thousands of renters face eviction. Many small business are closed or operating at reduced levels. Local governments are struggling with lost revenue. And the worst of the pandemic may yet be ahead in January or February.

The pandemic not only exposed the state’s economic inequality gap, it widened it. Those working in stable and, in some cases, booming industries have prospered enough to bolster state tax revenues. A strong stock market has magnified their gains. But low-income workers and small-business owners who suffered the most from the pandemic will emerge from it with more debt and fewer resources.

Repairing damage

The challenge for North Carolina’s state government in the months ahead will be to move from containing the public health crisis to repairing the damage done by its economic toll. The state is well positioned to do that even after the effect of federal stimulus spending wears off. It has $1.1 billion in its rainy day fund, $4 billion in an unreserved balance fund and a revenue stream that’s stronger than expected.

When the General Assembly returns in January, the emphasis should be on how to use this good fortune for those less fortunate. That means not only direct payments, but investment in schools, rural health care, vocational training and infrastructure. Other transformative changes – improbable with the current legislature – would be Medicaid expansion and a higher minimum wage.

What shouldn’t happen is a retreat in which lawmakers pad the state’s reserves and hold back on spending based on a misguided notion that the times call for caution.

“The state should be pretty generous with the budget. Right now is a terrible time to contract the budget,” said Brown of UNC. Budget cuts with so many in financial jeopardy, he said, would be “throwing fuel on a raging dumpster fire.”

At the start of the pandemic North Carolina officials said, “We’ll get through this together.” Now, with vaccines bringing the pandemic’s end into sight, the question is: Will North Carolinians recover from this together?

State lawmakers will start answering that in January.

This story was originally published December 20, 2020 at 4:00 AM with the headline "North Carolina is getting a big revenue surprise. Let’s use it the right way."